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Financial Results for the quarter ended 30th September, 2009

ITC delivered yet another quarter of strong performance with Post tax profits growing by 26% despite a challenging business environment. With the exception of the hotels segment, which is reeling under the impact of the global economic slowdown, all businesses posted strong bottom line growth. Cigarettes, FMCG Others, Agri and Paper & Packaging businesses grew handsomely in net revenues by 21%, 14%, 19% and 13% respectively.

Profitability improved on the back of better product mix, smarter sourcing of inputs and a series of targeted cost management actions. Investments in brand building in the Personal Care and Branded Foods businesses continue to impact the segment results of ‘FMCG-Others’.

Pre-tax profits and post tax profits at Rs 1492 crores and Rs 1010 crores respectively grew by 26% over the same period last year. Earnings Per Share for the quarter stood at Rs.2.67.

FMCG – Cigarettes | Branded Packaged Foods | Lifestyle Retailing
Personal Care Products | Education & Stationery Products
Hotels | Paperboards, Specialty Papers & Packaging
Agri Business | Sustainable Development

FMCG - Cigarettes

TThe Company’s uncompromising commitment to providing superior value to consumers through world class products helped in sustaining its leadership position in the cigarette industry. Innovation and consumer focus have enabled the business to deliver superior value through its brand portfolio of well crafted blends and contemporary packaging styles and use of state-of-the-art manufacturing technology. On the manufacturing front, investments are being progressed towards enhancement of quality, productivity and variety. Similarly, focussed initiatives have commenced to strengthen the trade and distribution channels.

Along with the smoking ban in public places, imposition of graphic health warnings on tobacco products has provided a fillip to the growth of smuggled contraband trade which does not comply with the regulatory requirement of graphic warnings. Restrictive regulations encourage tobacco consumers to switch to cheaper forms of tobacco, adversely impacting the earnings of farmers who grow cigarette type tobaccos.

The increase of VAT rates on cigarettes by some states like Maharashtra, Delhi, Rajasthan and Pondicherry from 12.5% to 20% distorts the basic concept of a common Indian market based on uniformity of rates in taxes. VAT was introduced on cigarettes in 2007 at 12.5% uniformly across the states, which was critical to preventing an unhealthy tax rate ‘war’ and trade diversion amongst States/Union Territories. The current increase in VAT would provide an attractive tax arbitrage opportunity and encourage illegal inter-state flow of cigarettes. Not only would it defeat the purpose of augmenting revenue, but would also result in trade falling into the hands of undesirable syndicates. The industry has urged the deviating states to retain the consensus VAT rate of 12.5%. Leaving the VAT on cigarettes untouched will help expand the tax base to augment revenue collections for the State Governments and prevent illegal inter state trade diversion.

The vacuum created by the exit of the popular low priced micros and plain non-filter cigarettes (in the wake of the heavy imposition of excise duties last year) has been occupied by duty-evaded illegal regular size filter cigarettes which are sold to consumers at Rs.10/- per packet of 10 cigarettes. These low priced tax-evaded illegal cigarettes are a growing threat to the legitimate industry, Government revenue, market stability and the social objective of regulating tobacco consumption. It is imperative that the authorities strengthen enforcement to eliminate this fast growing illegal industry. In addition, the Government could also consider the introduction of a new tax slab that would enable the legitimate industry to offer the consumer tax paid cigarettes at this price point.

The Company remains confident of leveraging its internationally benchmarked product quality, the resilience of its brands and the superiority of its competitive strategies to deliver strong results and shareholder value, despite the current difficult circumstances. 

Branded Packaged Foods

Notwithstanding challenging market conditions, the Branded Packaged Foods business continued to expand with sales growing by 13% over the previous year. The business has driven consumer franchise, improved the product mix, ensured smarter sourcing of inputs, improved servicing of markets and driven supply chain efficiencies.

The ‘Bingo!’ range of potato chips and finger snack foods continue to witness enthusiastic consumer response with improving sales, as the award winning marketing campaign along with focussed marketing schemes continue to reinforce the unique selling proposition of the exciting array of products.

The product mix of the ‘Sunfeast’ range of biscuits continues to improve with enhanced sales of value added variants of cookies and creams, which increased by 31%. The re-launch of ‘Marie’ has found wide acceptance of the consumers with sales increasing sequentially by 85%.

In the Staples category, ‘Aashirvaad’s’ leadership position continues to consolidate with sales improving by 11%. The Confectionery category revenues grew by 23% with enhanced sales of Eclairs and wider consumer acceptance of its variants such as Lactos and Tofichoos. This category also witnessed the launch of ‘Minto Gol’ during the quarter, a panned chews confectionery, which is now being extended across all markets.

The business is focusing on improving its margin profile with specific cost management actions.

Lifestyle Retailing

The Lifestyle Retailing business is consolidating its market presence in the branded apparel market. The business responded with speed to the economic slowdown, even as the mid tier segment bore the brunt of the weak consumer sentiment. First signs of improvement in market sentiment are visible with increase in footfalls and better conversion ratio. The business has successfully restructured its cost base and aligned itself to take advantage of emerging opportunities. It is in the process of increasing its footprint in carefully chosen markets with high density of premium customers. Investments are being made in store design, visual merchandising and customer service to enhance the shopping experience and further reinforce the premiumness of the brand.

Personal Care Products

The carefully architected portfolio of brands is gaining increasing consumer acceptance. The progress so far has met the internal milestones set by the business. Product development and research are being leveraged in a focused manner to build brand equity. Existing and proposed investments in tax exempt manufacturing capacities will provide assured quality, flexibility and cost advantage.

Adding yet another unique variant to the range of personal care products, the business launched transparent gel bathing bars, developed on the basis of insightful research. A first of its kind, it has been crafted through a patented technology. This product will bring to consumers the joy of a superior bathing experience through a shower gel in a bathing bar format. In a market where consumers expect differentiated products with clear and proven benefits, this product is expected to deliver competitively superior performance. This launch will be backed by an aggressive communication strategy, focussed consumer activation programmes and enhanced consumer engagement to build appreciable brand franchise.

Education & Stationery Products

The Stationery business continued on its impressive growth trajectory with improvement in market standing, emerging as the largest player in the notebook segment with a market share of 12%. The ‘Classmate’ brand which has established a strong presence amongst the India student community is extending its franchise with an enhanced portfolio of scholastic products comprising geometry boxes, pens, pencils and the recently launched markers, highlighters etc. The Classmate range, which stands for quality and dependability, is distributed through stationery stores, gifting & greeting outlets and modern format /general retail.

The business has leveraged the Company’s environment friendly superior paper, knowledge of image processing and printing, brand building capabilities and trade marketing expertise to successfully market a growing range of education and stationery products.

Hotels

The reduction in corporate travel, both domestic and international, continued to impact the hotels business. De-growth in occupancies and average room rates persisted during the quarter. Improvement in occupancies in the last couple of weeks of the quarter seem to provide early signals of recovery in the business which is expected to gain pace in the second half of FY 10. In these challenging circumstances, the business has demonstrated resilience by sustaining its leadership position in most markets.

ITC Royal Gardenia, the luxury hotel which epitomises the splendours of nature and embodies luxury with a green soul was soft launched in Bangalore. It is the first green luxury hotel in the city committed to environment protection in multiple ways.

The business continues to pursue an aggressive investment led growth strategy recognising the longer term potential of this sector and the need for greater room capacities commensurate with India’s economic growth.

Paperboards, Specialty Papers & Packaging

While the segment revenues posted a strong growth of 13%, segment results registered an even more impressive growth of 52%. The improvement in profitability was driven by better product mix, lower input costs and significant value capture in pulp mill operations.

Sales of value added paperboards and paper continued to record strong growth during the quarter, further enriching the product mix. Production of Paper from the one lakh TPA line and the output of the Pulp machine reached peak levels, leveraging the investments commissioned last year. This has enabled the business to tap the emerging growth opportunities in writing and printing paper and further consolidate its market standing. The doubling of pulp capacity with the investment in the ‘Ozone Bleached’ Pulp mill has enabled the business to achieve cost competitiveness and create a hedge against future rise in pulp prices.

In the Packaging and Printing business, satisfactory commissioning of investments in flexibles and carton lines is augmenting its capability to deliver value added packaging to key customers in the consumer electronics and FMCG industries. The business continues to provide state-of-the-art strategic sourcing support to the cigarette business. The full range of capabilities riding on multiple packaging platforms will enable the business to strengthen its position in the domestic as well as export markets.

Agri Business

Sustaining its competitive edge, the agri business improved its profits significantly, driven by the continuing strong performance of the leaf tobacco portfolio. The business maintained its position as the foremost exporter of leaf tobacco, leveraging the growing demand for Indian tobaccos. Gains were made in new business development and customised product and service offerings to both existing and new leaf tobacco customers. The business continued to provide strategic sourcing support to the Company’s cigarette business by ensuring international quality supplies.

Lack of market opportunities resulted in lower throughput of soya, coffee and spices, impacting agri product revenues during the period.

Contribution to Sustainable Development

In pursuit of its abiding commitment to create stakeholder value through service to society, the Company continued to make progress during the quarter in its social and environmental initiatives

The Company deepened its social sector imprint by expanding to newer districts during the period. Social development projects are currently being progressed in 54 districts spread over the states of Andhra Pradesh, Bihar, Kerala, Karnataka, Maharashtra, Madhya Pradesh, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal.

The pioneering social development projects include initiatives in watershed development, social farm and forestry programmes, soil & moisture conservation programmes designed to assist farmers in identified moisture-stressed districts, preservation of precious topsoil for agriculture and group irrigation projects. Towards improving the income earning capability of the farming community, sustainable agricultural practices were provided a major boost during the quarter with the promotion of organic fertiliser units through vermi-composting and NADEP technologies. Similarly, programme for genetic improvement of cattle was undertaken through artificial insemination to produce high-yielding crossbred progenies. Integrated animal husbandry services were provided during the quarter. These included addressing the needs of problem breeders, vaccines, feed additives and awareness drives. The initiative for the economic empowerment of women also continued apace with provision of gainful employment either in micro-enterprises or through self-employment with the support of income generation loans.

The Company’s initiative in the recycling programme ‘Wealth out of Waste (WOW)’ in various southern cities and towns has created considerable awareness on the benefits of the “Reduce, Reuse, Recyle” process. The success of this unique initiative, acclaimed by Indian civic authorities and applauded beyond India’s borders, will be leveraged to extend this programme to other cities in the country.

Flowing from its commitment to the triple bottom line philosophy, ITC has chosen Wind Energy as a focus area for enhancing its positive environmental footprint. The Company’s total investment in Wind Energy will soon touch Rs.250 crores when it commissions wind turbines in Maharashtra and Karnataka. The Company has already invested close to Rs.100 crores in wind energy generation in Tamil Nadu to meet the requirements of its Packaging business in Chennai. This 14 megawatt Clean Energy Initiative has delivered performance parameters which exceed original projections. The Company’s investments in Wind Energy are eligible for Carbon Credits under the Clean Development Mechanism of the Kyoto Protocol, resulting in substantial cost savings.
 

The Company’s social sector footprint can be seen at a glance in the following chart:

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